Market Insights

Advanced Micro Devices reports earnings next week, and options traders are bracing for a move.

The chip company’s implied volatility (IV), which reflects the market’s expectation of how much a stock could move, has risen sharply in the last two months. TradeStation data shows IV averaging 62 percent yesterday, up from 42 percent in early March. AMD’s current IV is the highest since the broader market bottomed in November 2022, according to TradeStation data.

Chart watchers may think the stock has been in a downtrend. It’s consistently remained below its 50-day moving average and made lower highs and lower lows. It’s also been sitting at a potentially important level where it bounced in late March and peaked in early April. That could make traders look for a sharp move in either direction after earnings next Tuesday, May 6.

They could potentially position for a rally using calls, which often gain value when prices rise because they fix the level where a security can be purchased. However, the elevated IV makes the options more expensive and may reduce the potential for making money.

Advanced Micro Devices (AMD), daily chart, with select patterns and indicators.

Traders can overcome this problem with vertical spreads, which involves buying an option near the money and selling another further from the money. The contract sold generates a credit, which reduces their cost. That lower cost, in turn, increases their potential leverage. AMD is also the 10th most active option underlier in the S&P 500, averaging about 375,000 contracts per session. That liquidity may help orders get filled.

AMD fell 0.3 percent to $96.06 yesterday. If an investor was bullish on the stock and thinks it might rally to $110, he or she could potentially do something like this:

• Purchase the 9-May 105 calls for $1.75.
• Sell an equal number of 9-May 110 calls for $0.89.
• That translates into a cost of $0.86.
• The position will be worth $5 if AMD closes at $110 or higher next Friday, translating into a gain of 481 percent from the shares rising 15 percent.
• Below $105, it expires worthless.

Bearish Put Spread

Alternately, traders may use a put spread if they have a bearish view. For example, they might look for AMD to fall toward last month’s lows around $76.48. This strategy would reflect that view:

• Purchase the 9-May 87 puts for $1.67.
• Sell an equal number of 9-May 82 puts for $0.82.
• That translates into a cost of $0.85.
• The position will be worth $5 if AMD closes at $80 or lower next Friday, translating into a gain of 488 percent from the shares dropping 15 percent.
• It expires worthless above $87.

The stock has lost 39 percent of its value in the last six months, making it the eighth worst performing member of the S&P 500 during that time. It’s struggled to compete with AI chips from Nvidia (NVDA), resulting in weaker profitability. For example, AMD grew revenue by 14 percent last year, while NVDA grew 114 percent. AMD’s operating margin was 8 percent, while NVDA’s operating margin was 62 percent.

OptionStation Pro, highlighting contracts cited above.

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